Stock Advisor Portfolio Management Strategies 1 — Questions and Answers
Question 1: What is 'asset allocation' in portfolio management?
- Selecting individual stocks to buy
- Distributing investments across different asset classes like stocks, bonds, and cash (Correct answer)
- Reinvesting dividends automatically
- Choosing a brokerage account type
Correct answer: Distributing investments across different asset classes like stocks, bonds, and cash
Asset allocation is the strategy of distributing a portfolio across different asset classes to balance risk and return based on an investor's goals and risk tolerance.
Question 2: What is 'diversification' meant to achieve in a portfolio?
- Maximize short-term gains
- Reduce unsystematic risk by spreading investments across different securities (Correct answer)
- Concentrate holdings in the best-performing sector
- Ensure all investments move together
Correct answer: Reduce unsystematic risk by spreading investments across different securities
Diversification reduces unsystematic (company-specific) risk by spreading investments across different assets, sectors, and geographies.
Question 3: What does 'rebalancing' a portfolio mean?
- Selling all positions and starting fresh
- Adjusting holdings back to target allocation percentages after market movements (Correct answer)
- Adding new funds to underperforming assets only
- Switching brokerages to reduce fees
Correct answer: Adjusting holdings back to target allocation percentages after market movements
Rebalancing restores a portfolio to its target asset allocation by selling overweighted assets and buying underweighted ones after market movements shift the balance.
Question 4: What is 'dollar-cost averaging' (DCA)?
- Buying stocks only when prices hit 52-week lows
- Investing a fixed dollar amount at regular intervals regardless of price (Correct answer)
- Converting foreign currency gains into dollars
- Averaging analyst price targets to set a buy price
Correct answer: Investing a fixed dollar amount at regular intervals regardless of price
Dollar-cost averaging involves investing a fixed amount regularly, buying more shares when prices are low and fewer when prices are high, reducing average cost over time.
Question 5: What is a 'benchmark' used for in portfolio management?
- Setting a stop-loss level
- A standard index used to measure portfolio performance (Correct answer)
- The minimum investment required
- A risk-free rate of return
Correct answer: A standard index used to measure portfolio performance
A benchmark, such as the S&P 500, is a standard against which portfolio performance is compared to evaluate whether the portfolio is outperforming or underperforming.
Question 6: What does 'alpha' represent in portfolio management?
- Total portfolio return
- The excess return of a portfolio relative to its benchmark (Correct answer)
- The risk-free interest rate
- The volatility of a portfolio
Correct answer: The excess return of a portfolio relative to its benchmark
Alpha measures a portfolio's return above or below its benchmark on a risk-adjusted basis, reflecting the manager's ability to generate excess returns.
Stock Advisor Portfolio Management Strategies 1
What is 'asset allocation' in portfolio management?